The More Formal The Vertical Marketing System, The _______.

I. Marketing and Distribution Channels

This unit has a lot of extra material above and beyond the textbook, as it is the area where I did my doctorate. It's also one of my favourite areas of Marketing because it deals first in channels which I find fascinating, and second in large things that move!

Channels of Distribution is known as "Place" in the "4 P's" model of Marketing. Distribution Channels provide the utility of place, of having products where the customer wants when the customer wants them. In these days of customer focus and emphasis on competition, the 4 P's model is considered very simplistic, and I've always thought that was probably why Marketers began referring to Place as Channels, to move us away from "The "4 P's" as a description of all of what Marketing is about; nevertheless, "place" is a convenient way to think of the term Channels of Distribution.

Distribution is particularly important in a country like Canada with our huge size and our northern climate. Every spring, trucks go down through the ice in places where frozen water is used as a seasonal road; this truck is sinking in Lake Winnipeg.
What is a Channel?

This was one of the hardest lectures to put onto the web, partly because an Internet class misses the costume and theatrics of when I teach it on-campus. Although I usually dress in reasonably formal business attire for my Intro Marketing lectures, on this day I show up in what I wear when out doing my academic research on the trucking industry -- jeans, Peterbilt sweatshirt, steel-toed boots, and yellow hardhat (see a picture here of me with my truck), and I start class by writing this question on the board because it's part of my ongoing research project on the image of truck drivers. Answer it now before you start work on the chapter.

Exercise
Truckers

Describe a person who drives a truck for a living.
Post your answer in the Moodle Discussion Group.

There are stereotypes out there about truckers. One of the best representations of these is from an article in the Toronto Star by Wheels columnist Mark Richardson, where he uses stereotypes about truckers to create a winning opening to the article. He is writing about test driving the Mazda Miata MX-5 25th Anniversary Edition. He brings out both the stereotypes of the rough trucker and the more likely reality of a gentle happy family man. Here is the start of Richardson's article from Saturday, August 23, 2014 (by the way it's no coincidence that he's talking about a little red Mazda MX5 - Miata, which is my own beloved little red car):

Roadster Even a Trucker Will Love, Mark Richardson, Special to the Star

"The big trucker walked over to where I was sitting in the restaurant and towered over my table, hands on hips. His dark arms crawled with tattoos beneath thick curled hair.

'Is that your Mazda outside?' he said, with a deep diesel voice and a touch of Quebec. I lowered my burger slowly to the plate, met his eyes and gulped just a little. Any words would have wavered, so I nodded, pretending to chew. Outside in the truck stop lot, the little red convertible stood out like a drop of fresh blood on a face pocked with Kenworths, Freightliners and Macks. Much like the face of this trucker standing over me, squinting down at the only car driver in the joint.

'What year is it? he asked. Is it this year? I have a 2009 at home. It's a great car. May I?' And he took the seat opposite, and I gulped again and breathed a little easier. He told me about his car, and about the drive he took last summer with his wife around the Gaspe Peninsula. He said he loved its simplicity because he spent his work days behind the wheel of a huge tractor-trailer, rowing through 18 gears and constrained by log books and places to be. With the little soft-top, he and his wife could go where they wanted and enjoy the feel of the drive again." (The article continues).

Why Are Marketing Intermediaries Used?

The answer is as simple as looking at a map of Canada: 5,000 miles coast to coast, a heck of a lot of roads & railroad track, and most of the manufacturing centered in one part of the country. How are you as a manufacturer in southern Ontario going to know what will sell in Kamloops, B.C.?

Remember Johan Arndt in Unit 1, who said that the true definition of Marketing is matching supply and demand? That's one of the major reasons channels of distribution are used - to match the supply of product in one place with the demand for it in another. What's at the heart of Marketing Channels (Place) can be summed up in fewer than 15 words, using Professor Li's model of understanding a topic:

Golf Balls : cheaper to make 5,000 at once but consumers buy 5 at a time

How Channel Partners Add Value

By Function:

It's not a question of WHETHER we do these functions but of WHO does them; they must be done in order for products to be sold.

Exercise - Plan
Functions

For at least three of these functions, describe specifically what your Marketing Plan product will do to fulfill them.
Post your answer in the Moodle Discussion Group.

By Levels of Distributors

Direct

Manufacturer

Consumer

Indirect

There are three main theories about how companies decide on what kinds and how many channels to use. If you're REALLY interested in this stuff, you can go to the York Library and check out my doctoral thesis but if you don't need help getting to sleep, here's a brief summary

Economic Perspective
Which arrangement is best in terms of producing economies of scale and reducing overlap?

Behavioural Perspective
Which arrangement is best in terms of how people will feel, act, react? What are the costs (direct and indirect) of organizing yourself in a particular way? Critical issues here are power and control, competition, conflict, cooperation, roles, communication, authority, and leadership

Transaction Cost Analysis
TCA looks at both governance costs and production costs, providing a way to put dollar amounts on behavioural as well as economic costs. In the presence of small numbers of suppliers, you decide whether you use something frequently or not, how uncertain things are in your environment, and how specifically geared to your own company the thing in question is

Example: The Reefer
(the legal kind)

Suppose you own an ice cream business in a small Ontario town. You deliver ice cream to local stores and restaurants. Even though it's a small town, you still need a refrigerated trailer (reefer) because ice cream melts fast. You make deliveries at all hours, and you're never sure when you may need get a call to deliver ice cream. There is only one reefer available in your small town, the only one within a 600 mile radius. Do you want to own that reefer or rent it from someone? Generally speaking it's better to buy in the free open competitive Market (rent it) unless these four things exist, in which case you should include it as part of the Hierarchy of your organization (own it). Hence the thesis title: Channels Strategy and The Use of Advertising Agencies: A Markets and Hierarchies Model

Small numbers - only one truck

Frequency - you're using it all the time

Uncertainty - you don't know when you'll need it

Asset Specificity - reefer is specifically designed for your purposes

There -- an entire 241 page doctoral thesis in fewer than 150 words! Only I did my thesis on the question of whether a company uses the basics of transaction cost theory in deciding whether to use a full-service ad agency or do it in-house, something I came affectionately to call the "in-house/outhouse question"

Be very grateful! When I was a newly-minted Doctor of Philosophy, teaching my Marketing classes at York, I absolutely believed it was totally necessary to take my students through a full recitation of the details of the magnificent logistic regression I recently had done for my doctoral thesis! Now, years after becoming a PhD, I can just tell it to you in under 150 words.

Exercise - Plan
TCA

Can you make this make sense in a world you understand? What are the four elements of Transaction Cost Analysis in relation to your Marketing Plan product? Uncertainty is a given in any business venture, but are there particular reasons why you face more uncertainty than normal? Are there small numbers? Are there specific assets? How about frequency?
Post your answer in the Moodle Discussion Group.

Types of Channel Partners

Retailers
Wholesalers
Drop Shippers and Rack Jobbers
Brokers
Agents

Wholesalers

Wholesalers are generally used when they are better at performing one or more of the Distribution Channel Functions

Functions of Wholesalers

Distribution Function	Example for Wholesaling
Information	Telling retailers about the competition
Product	Building assortments needed by retailers
Price	Reaching many small retailers at low cost
Place	Providing quick delivery by being located closer to retailer than the producers are
Promotion	Having contacts with the buyer
Ownership	Holding inventories, absorbing risk

Types of Wholesalers

Wholesaler Marketing Decisions
Wholesalers make pretty much the same decisions that retailers do, where their product is the assortment of products and services they offer.

Exercise - Plan
Wholesaler Decisions

What kind of wholesaling decisions will have to be made about your Marketing Plan product? Who will make them? Will you use a traditional wholesaler or a new method? Tell us about your decisions.
Post your answer in the Moodle Discussion Group.

Wholesaler Marketing Decisions
As well as decisions with the 4 P's:

Organization and Management of Channels

Direct versus Indirect Channels

Conventional Channel	Amount of Control Almost no control	Control Maintained By
Administered Vertical Marketing System	Some control	Economic power and leadership
Horizontal VMS	Some control	Alliances
Hybrid VMS	Some control	Mixture of Conventional/VMS
Contractual VMS	Strong control	Contract
Corporate VMS	Total control	Company Ownership

Exercise
Where Do You Shop?

Tell us about some places where you shop and how you believe the goods or services got there.
Post your answer in the Moodle Discussion Group.

Disintermediation

Vertical Marketing Systems - Distribution Strategy

Channel design must be part of your overall marketing strategy. Just as you wouldn't advertise a $20,000 Rolex watch in Magazine, likewise you wouldn't plan to sell one in the Everything-For-A-Dollar store.

Check this out and think it through; I almost always ask about it on the in-class test:

When might you legitimately advertise a Rolex watch in Mad Magazine?

Analyzing Consumer Service Needs

Exercise - Plan
Channel Needs

A channel's purpose is to deliver the product to the consumer. Which system is going to best meet the needs of your Marketing Plan customer? What does your customer need in a channel?
Post your answer in the Moodle Discussion Group.

Setting Channel Objectives and Constraints
What do you want to do, what in your situation will help you and what will hinder you?

Identifying Major Alternatives
Types of Intermediaries

Company Sales Force - having your own in-house sales force provides the most control over selling activities, but entails high fixed costs and supervision

Manufacturer's Agency - using independent companies who sell non-competing, complementary products to a group of customers, paid a commission based on the amount sold, can provide quick access to new markets, but loyalty and selling effort must be shared with other product lines

Wholesale Distributors - these are independent companies that specialize in the selling, storage, and servicing of other business customers for a wide variety of product lines. They may provide market coverage over a large geographic area, but may carry product lines of your competitors

Exercise
Types of Intermediaries

For what kind of product might a manufacturer want to use their own in-house sales force rather than using an outside agency?
Post your answer in the Moodle Discussion Group.

Number of Intermediaries - this is one of the core concepts in Channel of Distribution. Will your product be available everywhere, or will you sell your product either selectively, or perhaps in only a few exclusive stores.

Intensive	Stocking the product in as many outlets as possible Used for Convenience Goods	Even found sold in a boat floating down a deserted section of the Nile River, says one Globe and Mail reporter
Selective	Using more than one but fewer than all of the intermediaries who are willing to carry the company's products Used for Shopping Goods	In a some select places; you may not find a GE appliance in a small Mom&Pop store
Exclusive	Giving a limited number of dealers the exclusive right to distribute the company's products in their territories Used for Specialty Goods	You can't buy a Rolls Royce or a Ferrari just anywhere

Exercise - Plan
Number of Intermediaries

How many intermediaries will you use in distributing your Marketing Plan product? Why?
Post your answer in the Moodle Discussion Group.

Horizontal and Hybrid Marketing Systems

Exercise
Innovation

Can you give an example of a distribution channel that was specifically created for one type of product? Something that didn't exist before that product needed to be distributed, a channel that was created specifically for a product.
Post your answer in the Moodle Discussion Group.

Exercise: Lab
Channel Captains

Go to a car dealership near you and talk to someone there about conflicts that arise in their business, and whom they might regard as "Channel Captains" (explain the term to them as we use it here).
Post your answer in the Moodle Discussion Group.

II. Retailing

Differences between the United States and Canada

One of the things I get asked at conferences, when people find out I'm from Canada, is how is Canada different from the United States? I reply, in two ways. First, Canadians know there is a difference and Americans don't. But secondly, most Canadians believe in the greater good for the greatest numer of people, while a whole lot of Americans believe in the rights of the individual.

There are major differences between shoppers in Canada and those in the United States. Keep this in mind while you read this chapter. Note too the text's emphasis on many new things in the Retail world, including online retail, and social media and mobile devices.

Functions of Retailers

Distribution Function	Example for Retailing
Information	Collecting information about customers in store
Product	Advise manufacturer on product design changes
Price	Offer smaller volume of goods for consumer to buy
Place	Offer variety of products in one location for consumer
Promotion	Run own ads or team up with manufacturer in joint ads
Ownership	Absorb risk by taking title and bearing cost of theft, damage, etc.

Types of Retailers
Retailers are classified by:

Exercise
Types of Retailers

What kind of retailer do you shop at most frequently? Why?
Post your answer in the Moodle Discussion Group.

Retailer Marketing Decisions

Exercise - Plan
Retailer Decisions

From among all these kinds of decisions that retailers have to make, what kind will the retailer who handles your Marketing Plan Product have to make? If you don't have a retailer, what decisions will you be making in order to market your product?
Post your answer in the Moodle Discussion Group.

The Wheel of Retailing

If you've ever wondered why those great little discount stores you go to don't seem to last forever, the Wheel of Retailing theory explains why. As soon as a discount store starts to get reasonably successful, usually they then start to imitate the bigger mainstream stores, and soon they're not low-end enough to afford to sell at discount prices any more.

The Future of Retailing

III. Supply Chain Management and Logistics

Nature and Importance of Marketing Logistics

Goals of the Logistics System

Marketing Plan Hint - What will work best for how you want to serve your customer?
Think of this as the "Trucks or Warehouses" decision.
Post your answer in the Moodle Discussion Group.

Major Logistics Functions

Integrated Logistics Management
As with everything else about Marketing, it all has to fit together into an integrated whole

Logistics Technology - Changes in Technology have had a huge effect on logistics, in most cases making it far easier than it was in the past. One example is the fitting of trucks with gadgets that will keep track of the truck driver's location and time spent. Needless to say, this is not as popular with drivers as it is with bosses.

Third Party Logistics - This is part of the inhouse-or-outside question that I addressed in my thesis. Some companies find it cheaper and easier to own their own trucks, whereas others will find it a better choice to hire someone else to do the moving.

Environmental Impact of Logistics - this is becoming especially important recently with all the movements to greener business practices.